Interest and Prices

Knut Wicksell, a Swedish economist, significantly advanced monetary theory around the turn of the 20th century. His work, particularly in Interest and Prices, focused on how discrepancies between the market interest rate and a hypothetical "natural rate" could lead to inflation or deflation. The natural rate is the interest level needed for full employment and stable prices.12

Wicksell argued that if the market rate is below the natural rate, it can stimulate investment and lead to inflation, especially if banks finance the difference by expanding credit. Conversely, a market rate above the natural rate can cause deflationary pressure. John Maynard Keynes later built upon Wicksell's ideas, exploring how market dynamics and speculation could influence these rates, even without changes in the money supply.13